US Economic Outlook – 10 January 2020

Our baseline growth and inflation outlook is unchanged, but a number of key downside risks have decreased over the past month. The détente between US and China has held, and the countries plan to sign a Phase One trade deal mid-January. However, the agreement keeps most existing tariffs in place, except for a slight reduction in the tranche enacted last September, so we don't foresee more than a marginal impact on our existing growth projections. Additionally, December also saw a reduction in uncertainty around Brexit developments, ratification in the US House of Representatives of the trade deal between the US, Mexico and Canada, and no further Presidential action on auto tariffs on Europe.

More recently, the escalation of tensions between the US and Iran has heightened concerns around a military confrontation in the Middle East, but we expect the economic and financial market impact to be limited, particularly as the US economy has become a lot less oil intensive and became a net exporter of oil products late last year. On balance, we have revised downward our probability of recession in the next 12 months from 35% to 30%, and now foresee the Federal Reserve holding off on any further rate moves over the forecast horizon. In line with less downside risk and a revised policy rate, we also expect the 10-year yield to be higher than previously forecast, at 1.7% by year end.

Key takeaways:

  • Downside economic risks have diminished somewhat over the past month.
  • We have revised down our probability of recession in 2020 to 30%.
  • While the manufacturing segment is still struggling, the services sector and consumer spending remain resilient, and the housing markets are responding positively to lower interest rates.
  • Given lesser downside risks, we now expect the Fed to be on hold this year and have also revised up our expectation for long bond yields.


Economic Outlook US Economic Outlook - 10 January 2020